The Wall Street Journal of 4/18/ 2019 had a column entitled “Easy Money, Bad Decisions” by James Grant reviewing Andrew H. Browning’s book, The Panic of 1819. Grant related how the government’s financing of excessive expansion with careless loans led to panic and crisis.
Plus ça change, plus c’est la meme chose. The more things change, the more they stay the same. The principles and laws of borrowing and repayment remain as valid now as they were in 1819. The granting of credit simultaneously satisfies two conceptually distinct, but partly overlapping functions: 1) to bridge the short-term and long-term gaps of time between payments made and payments received, and 2) to infuse more money into the expanding system to permanently enable expeditious payments of expanded activity.
Money is a dummy invented by humans to enable divided exchange. Money is a promise of trust between people. But, simple as money’s functional purposes may seem, the determinations of how much money to create through the credit function is not well understood. There are natural limits to the supply of money, though the menace of so-called Modern Monetary Theory’s unconstrained printing of money would not have it so..
… economic developments are finite, and so no economic development will accelerate indefinitely. (CWL 15, 14)
The limits of the creation of money are not well understood by private- and government-sector borrowers, congressional spending-and-deficit hogs, and the Central Bank’s economists and technicians. The principles and laws are frequently ignorantly scoffed at by the practice of participants whose minds are locked in mistaken common sense rather than functioning intelligently according to the tenets of a reliable macroeconomic theory. And, even though we now have a) a Central Bank able to price-fix the interest rate, b) more advanced banking technology, and c) an improved financial information system, the economic process may be steered into a ditch by the various participants.
A study of the mechanics of motor-cars yields premises for a criticism of drivers, precisely because the motor-cars, as distinct from the drivers, have laws of their own which drivers must respect. But if the mechanics of motors included, in a single piece, the anthropology of drivers, criticism could be no more than haphazard. (CWL 21, 109)
Again, the Wall Street Journal of 4/18/ 2019 had a column entitled “Easy Money, Bad Decisions” by James Grant reviewing Andrew H. Browning’s book, The Panic of 1819. Grant related how the government’s financing of excessive expansion with careless loans led to panic and crisis.
But it was man-made change in the banking environment that seeded the prosperity that preceded the depression. Silver and gold were the constitutional forms of money, but bank notes – promises to pay those precious metals to anyone who asked for them – had become the de facto American currency. And as banks proliferated so did the notes – issued by as hodgepodge of wobbly state banks – and so did inflation. It was a sign of the times that many aspirational wheat farmers lacked the cash with which to buy their land and that it was government that helped them to make ends meet, temporarily. … Between 1815 and 1818, (Browning) calculates, … nationally banks grew by at least 30 per cent .. everybody went into banking. ¶Panic came in its course. “The paper bubble is then burst,” … Real estate went begging as formerly prime Virginia land couldn’t command the price equivalent even to the single year’s rent that it might have earned. Jefferson himself became the “best-known victim” of the Panic of 1819, Mr. Browning writes, although no one forced the author of the Declaration of Independence to run up the immense debts that brought him down. ¶People will over-lend and over-borrow until the day of reckoning. They did it in 1919. They are doing it today. It’s just the way we are.
In 1862 Clement Juglar warned about excess investment. In the following excerpt he references excess investment causing artificial, excess prosperity. Note our addition of the words “excess” and “artificial”. Properly managed prosperity does not necessarily lead to recession or depression.
… economic developments are finite, and so no economic development will accelerate indefinitely. They operate against an increasing resistance, to justify Juglar’s celebrated pronouncement: “the only cause of depression is prosperity.” (CWL 15, 14; as quoted in Schumpeter, “History”1123-24)
(Ftnt: “Juglar,” “who was a physician by training,” … “must be ranked, as to talent and command of scientific method, among the greatest economists of all times.” “Third, he went on to try his hand at explanation.” “all important … was his diagnosis of the nature of depression, which he expressed with epigrammatic force in the famous sentence: ‘the only cause of depression is prosperity.’ This means that depressions are nothing but adaptations of the economic system to the situations created by the preceding prosperities and that, in consequence, the basic problem of cycle analysis reduces to the question what is it that causes prosperities — to which he failed to give any satisfactory answer.” (Schumpeter, History, 1123-24))
Based upon the invariant normative relations of Macroeconomic Field Theory, represented in the Diagram of Rates of Flow, (CWL 15, 53-55), Lonergan points out that
… positive or negative transfers to basic demand (D’-s”I’) and consequent similar transfers to surplus demand (D”-s”I”) belong to the theory of booms and slumps. They involve changes in (aggregate basic or aggregate surplus) demand, with entrepreneurs receiving back more (or less) than they paid out in outlay (which includes profits of all kinds). The immediate effect (of these aberrational monetary transfers) is on the price levels at the final markets, and to these changes (in price), enterprise as a whole responds to release an upward (or downward) movement of the whole economy. But the initial increased transfers to demand [that is, excess transfers along (D’-s’I’) and (D”-s”I”) ] are not simply to be supposed. For that would be postulating without explaining the boom or slump. [CWL 15, 64]
Expansion of the economic process occurs in phases. The ratio of basic Income I‘ to total income (I’ + I”) , i.e. I’/(I’ + I”), must shift according to the requirements of the phase of the expansionary process. Our culture has no good ideas on the scientific necessity for this shift.
But the Basic Expansion fails to be Implemented.
The complaint is that there exist, in the mentality of our culture, no ideas, and in the procedures of our economies, no mechanisms, directed to smoothly and equitably bringing about the reversal of net aggregate savings to zero as the basic expansion proceeds. Just as there is an anti-egalitarian shift to the surplus expansion, so also there is an egalitarian shift in the distribution of income in the basic expansion. But while we can effect the anti-egalitarianshift with some measure of success, in fact the egalitarian shift (required for the basic expansion) is achieved only through the contractions, the liquidations, the blind stresses and strains of a prolonged depression. (CWL 15, 153-54)
Now in any expansion it is inevitable that quantities under production run ahead of quantities sold. Current production is with reference to future sales, and if there is an expansion, then future sales are going to be greater than current sales. But in the free economies the acceleration factors are not held down to the minimum that results from this consideration. During the surplus expansion the basic price-spread ratio J will increase from an increase of R, of a”, and also of a’. The advance of the price-spread ratio will work out through a rise of the basic price level, and selling prices generally will mount. Now, when prices are rising and due to rise further, the thing to be done is to buy now when prices are low and sell later when they are high. There results a large amount of liquid investment. Each producer orders more materials, more semifinished goods, more finished goods, than he would otherwise. Moreover, he makes this speculative addition to a future demand estimated upon current orders received, so that the further back in the production series any producer is, the greater [will be] the speculative element contained in the objective evidence of current orders received, the more rosy the estimate of future demand, and the greater the speculative element he adds to this estimate when he places orders with a producer still further back in the series. Thus an initial rise in prices sets going a speculative expansion that makes the acceleration factors quite notable, expands the price spread still more, and stimulates a pace of further acceleration that it will be quite impossible to maintain. Etc. [CWL 15, 160]
Banks are willing to increase the quantity of money as long as there is no appearance of uncontrolled inflation, but they curtail and even contract loans as soon as an upward spiral of prices menaces the monetary system. Thus the root of the failure of the mechanism is the failure to obtain the anti-egalitarian shift in the distribution of income. [CWL 15, 138]
In equity (the basic expansion following the surplus expansion) should be directed to raising the standard of living of the whole society. It does not. And the reason why it does not is not the reason on which simple-minded moralists insist. They blame greed. But the prime cause is ignorance. The dynamics of surplus and basic expansion, surplus and basic incomes are not understood, not formulated, not taught….. [CWL 15, 82]
When intelligence is a blank, the first law of nature takes over: self-preservation. It is not primarily greed but frantic efforts at self-preservation that turn the recession into a depression, and the depression into a crash. [CWL 15, 82]
Previously I have suggested a lack of adaptation in the free economies to the requirements of the pure cycle. What that lack is can now be stated. It is an inability to distinguish between the significance of a relative and an absolute rise or fall of monetary prices. A relative (i.e. “real”) rise or fall (in prices between and among products) is, indeed, a signal for a relatively increased or reduced production (of one product relative to another)………(much)……..Inversely, the rising prices of the surplus expansion are not real and relative but only monetary and absolute rising prices (resulting from an increase of p”Q”/p’Q’); to allow them to stimulate production (beyond the bounds determined by technical coefficients) is to convert the surplus expansion into a (substantially artificial) boom (which must be followed out of systematic necessity by a corrective and devastating slump-recession-depression). This I believe is the fundamental lack of adaptation to the productive cycle that our economies have to overcome. The problem, however, has many ramifications of which the most important is the relativity of the significance of profits. To this we now turn. (CWL15, 139-140)
Also see Steven Gjerstad and Vernon L. Smith: From Bubble to Depression